Dollar slides as stocks soar

The Australian dollar is the top performing currency for the third consecutive day with an advance of more than 2.4% against a weaker greenback at noon in New York. Headlines this morning sparked a massive rally in risk after the Chinese central bank cut reserve requirements by 50 basis points for its first move at easing policy measures in three years. Adding fuel to the rally was a coordinated effort by the world’s largest central bank to boost liquidity by cutting swap rates by 50 basis points. The Fed, ECB, BoE, BoC, BoJ, and the SNB agreed on the measure in an effort to combat a looming liquidity crunch which continues to threaten global finance in the face of the European sovereign debt crisis. Equity markets surged on the news with the US stocks advancing 3.4-3.6% across the board as debt concerns subsided. In the long run however, the move is unlikely to thwart off further contagion fears as the issue at hand continues to be one of solvency, not liquidity.

Nevertheless, risk assets remain well supported with the high yielding aussie besting the majors in afternoon trade with an advance of more than 3.5% this week alone. The AUD/USD breeched our topside limit noted in yesterday’s Scalp Report at 1.0120 before encountering resistance at the 1.03-figure. The aussie continues to trade within the confines of an ascending channel formation dating back to the 25th of November. Although our longer-term outlook on the pair remains weighted to the downside, today’s developments do suggest that in the interim risk may stay well supported.

Interim support rests at 1.0227 backed by the 23.6% Fibonacci extension taken from the October 27th and November 13th crests at 1.0175 and 1.0120. A break below the convergence of channel support and the 50% extension at 0.9990 changes the short-term outlook with such a scenario eyeing subsequent targets at 0.9950 and the 61.8% extension at 0.9910. A breech above the convergence of channel resistance and the 1.03-figure risks further losses for the greenback with topside targets eyed at the November 11th high at 1.0340, the 1.04-handle, and 1.0470. Overnight traders will be eying data out of Australia with October retail sales, and building approvals highlighting the economic docket.

Key Levels/Indicators

Level/Indicator

Level

100-Day SMA

1.0322

50-Day SMA

1.0074

20-Day SMA

1.0073

2011 AUD High

1.1079

Upcoming Events

Date

GMT

Release

Expected

Previous

11/30

22:30

AiG Performance of Manufacturing Index (NOV)

-

47.4

12/1

0:30

Retail Sales s.a. (MoM) (OCT)

0.4%

0.4%

12/1

0:30

Building Approvals (MoM) (OCT)

3.3%

-13.6%

12/1

0:30

Building Approvals (YoY) (OCT)

-14.4%

-12.0%

12/1

5:30

RBA Commodity Price Index (NOV)

-

107.5

12/1

5:30

RBA Commodity Index SDR (YoY) (NOV)

-

19.4%

The yen is the weakest performer against the greenback with and advance of just 0.41%. Both the yen and the dollar have come under tremendous pressure as investors jettisoned lower yielding safety assets in favor of higher yielding risk assets. As expected however, losses in the greenback are likely to continue to outpace those of the yen and accordingly the USD/JPY pair looks to challenge its current ascending channel formation. The pair did briefly dip below the convergence of channel support and the 50% Fibonacci retracement taken from the intervention advance at 77.50 before rebounding off soft support at 77.30. Interim support now holds with channel support with subsequent floors seen at 77.30, the 61.8% retracement at 77.05, and 76.80. A break 77.70 eyes topside targets at the 38.2% retracement at the 78-figure and 78.25. I remain neutral on this pair here noting that in the medium-term, further topside moves are likely as Japanese officials continue to warn against excessive speculation in the currency and the risk it poses to the fragile recovery.

Michael Boutros, Currency Analyst for DailyFX.com is a Technical/Fundamental Analyst specializing in the FX markets. E-mail:mboutros@fxcm.com.